Creditor Days Ratio in Accounting

What is the Creditor Days Ratio?

The creditor days ratio shows the average number of days your business takes to pay suppliers.

It is calculated by dividing creditors by the average daily purchases.

What is the Formula for Creditor Days?

Creditor Days = Creditors / Average daily purchases = Creditors / (Purchases / 365)
  • Creditors is given in the Balance Sheet and is normally under the heading Trade Creditors or Accounts Payable.
  • Purchases is found in the income statement. Assuming inventory levels to do change substantially over the year, purchases can be estimated by taking the total of cost of sales and overhead costs

How is Creditor days calculated in practice?

1. Purchases from the income statement
Revenue 440,000
Cost of sales 176,000
Gross profit 264,000
Overheads 135,000
EBITDA 129,000
Depreciation 65,000
Interest 20,000
Profit before tax 44,000
Tax 9,000
Profit after tax 35,000
2. Creditors from the Balance Sheet
Property 300,000
Other fixed assets 90,000
Fixed assets 390,000
Cash 5,000
Trade debtors 95,000
Other debtors 30,000
Inventory 20,000
Current assets 150,000
Trade creditors 70,000
Other creditors 30,000
Current liabilities 100,000
Working Capital 50,000
Bank overdraft 20,000
Bank loans 120,000
Other loans 70,000
Borrowings 210,000
Net assets 230,000
Capital 60,000
Retained profits 170,000
Owners Equity 230,000

In the example above the cost of sales is 176,000 and overheads are 135,000 giving total purchases of 311,000, and trade creditors are 70,000. The creditor days ratio is calculated as follow.

Days = Creditors / (Purchases / 365)
Days = 70,000 / (311,000 / 365) = 82 days

It takes the business on average 82 days to pay its suppliers.

In the above example it is assumed that other creditors does not relate to purchases, for example it might relate to deposits or deferred income, and it is therefore excluded from the calculation.

If you are using purchases for a different period then replace the 365 with the number of days in the management accounting period. For example, if monthly purchases are 18,000 and month end creditors are 19,000 the creditor days is calculated as follows.

Days = Creditors / (Purchases / 30)
Days = 19,000 / (18,000 / 30) = 32 days

What does the Creditor Days Ratio show?

If your Creditor Days are increasing beyond your suppliers normal trading terms it indicates that the business is not paying its suppliers as efficiently as it should be. For example if your normal terms are 30 days and your Creditor Days ratio is 60 days the business on average is taking twice as long to pay suppliers  as it should do.

Any downward trend in the Creditor Days ratio means that an increasing amount of cash (possibly from overdrafts) is needed to finance the business, this can be a major problem for an expanding businesses.

Useful tips for using Creditor Days

  • The creditor days should be the same as your Terms of Trade with suppliers. If the days ratio is continually higher it means the business is paying its suppliers late which could eventually lead to supply problems. If the days ratio is trending lower than the normal terms of trade it could indicate that suppliers are being paid too early, reducing the amount of cash available in the business, or it might possibly be due to early settlement discounts being taken from suppliers.
  • A cash business should have a much lower Creditor Days figure than a non-cash business.
  • Typical ranges for the creditor day ratio for a non-cash business would be 30-60 days.
Creditor Days Ratio in Accounting September 21st, 2017Team

You May Also Like